Is the recent stock market performance of Saregama India Limited (NSE: SAREGAMA) linked to its strong fundamentals?
Most readers already know that Saregama India (NSE: SAREGAMA) stock has risen significantly by 86% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. Specifically, we have decided to study the ROE of Saregama India in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Saregama India
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Saregama India’s ROE is:
22% = ₹ 1.1b ÷ ₹ 5.1b (based on the last twelve months up to March 2021).
The “return” is the annual profit. This means that for every having shareholders, the company generated 0.22 profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Saregama India profit growth and 22% ROE
For starters, Saregama India’s ROE seems acceptable. Especially compared to the industry average of 7.1%, the company’s ROE looks pretty impressive. This likely laid the foundation for Saregama India’s significant 35% net income growth over the past five years. We believe there could be other factors at play here as well. Such as – high profit retention or effective management in place.
We then compared the net income growth of Saregama India with the industry and we are happy to see that the growth figure of the company is higher compared to the industry which has a growth rate of 26% at the during the same period.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Is Saregama India just valued over other companies? These 3 evaluation measures could help you decide.
Is Saregama India Efficiently Using Its Retained Earnings?
Saregama India has a very low three-year median payout rate of 14%, meaning it has the remaining 86% to reinvest in its business. So it looks like Saregama India is reinvesting its profits massively to grow its business, which is reflected in its profit growth.
In addition, Saregama India is determined to continue to share its profits with its shareholders, which we deduce from its long history of nine years of paying dividends. Our latest analyst data shows the company’s future payout ratio is expected to reach 23% over the next three years. Either way, the ROE is not expected to change much for the company despite the expected higher payout ratio.
Overall, we are quite happy with the performance of Saregama India. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience substantial growth in profits. That said, the latest forecast from industry analysts shows that the company’s earnings growth is expected to slow. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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